AP Micro Unit 1: Economic Thinking

scarcity

the inability of our limited resources to satisfy human wants, pervasive

factors of production

land, labor, capital, entrepreneurship

command economy

An economic system in which the central planner (government) controls a country's economy.

market economy

Economic decisions are made by individuals or the open market, decentralized economy, has private property rights

mixed economy

An economy in which private enterprise exists in combination with a considerable amount of government regulation and promotion (what USA has)

opportunity cost

the value of the next best alternative not chosen, the cost of a CHOICE

explicit cost

a cost that requires an outlay of money

implicit cost

A firm's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment

opportunity cost

explicit cost + implicit cost

production possibilities curve

A graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good.

PPC increasing costs

2 resources are not perfectly adaptable to one anohter

PPC constant costs

2 resources are "perfectly adaptable" for one another

productively efficient

Any point on the PPC is considered to be _________ _________

inefficient

Any point inside the PPC curve is considered to be _______

scarcity

Any point outside the PPC curve is ________, impossible because you cannot produce if you do not have the resources to. (point B on the graph)

resources

PPC shifts with changes in the quality or quantity of ______

PPC growth

shifts right

PPC negative growth

shifts left

PPC technology

only impacts 1 good, the other good stays unaffected

absolute advantage

the ability to produce more goods or using fewer resources

higher

Absolute advantage with outputs: ______ number (ex: tons)

lower

Absolute advantage with inputs: ______ number (ex: hours)

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer. (always the LOWER number)

Input opportunity cost

"It Over": A = A/B

output opportunity cost

"Other over": A = B/A

mutually beneficial terms of trade

range of acceptable exchange rates

amount between the opportunity costs of the other product for one unit of the current product. (should be in between the range of the opportunity costs calculated)

marginal analysis

analysis that involves comparing marginal benefits and marginal costs

MB = MC

benefit maximizing point

MB > MC

In marginal analysis, keep producing as long as ____

diminishing marginal utility

as a person increases consumption of a product, there is a decline in the marginal utility that person derives from consuming each additional unit of that product.

utility maximizing combinations

MUa/Pa = MUb/Pb (you should consume more of whichever one gives you more utils per dollar)